Ever since Sen. Dick Durbin smuggled debit card price controls into Dodd-Frank, the Federal Reserve has imposed an interchange fee rate cap on debit transactions.
In a recent CTUP paper, we found that these price controls reduced average swipe fee revenue for banks by $6 to $8 billion, and caused most banks to stop offering free checking accounts. Free checking had previously relied on a business model funded by swipe fees. Durbin’s policy caused roughly one million mostly poor families to lose their bank accounts. This was a transfer of an estimated $1 to $3 billion in income from low-income families to large retailers and merchants, who benefited from the lower fees.
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So naturally, instead of junking the fees and letting the free market in banking work, the Federal Reserve wants to double down on a policy that clearly isn’t working. The Fed is now proposing to make the debit card price controls even more stringent.
Amazingly, the Fed regulators acknowledge they “cannot determine at this time whether the potential benefits of the proposal to consumers exceed the possible costs imposed on consumers and financial institution.” This new rule sounds just like the way the Fed determines monetary policy: they make it up as they go along.
It’s a textbook case study of how the hidden and unintended costs of regulations almost always outweigh the benefits – and often hurt the poor the most.
